During the financial crisis, private equity, mezzanine and venture capital firms have spent a lot of time "cleaning house."  The financial crisis has made cheap debt less available and thus private equity and other firms are not able to complete deals with the huge leverage ratios that existed prior to the crisis.  So, they have taken a close, hard look at existing investments in order to determine which could be saved and have allocated resources appropriately.  

This sort of review has included, from a legal perspective, review of debt covenants and commercial contracts.  The firms have wanted to determine which of their portfolio companies are in danger of violating a financial covenant or failing to perform under a critical contract. 

Recent reviews have also included analyses of potential exit strategies in a down economy.  The potential strategies include the traditional options of bankruptcy, sale and IPO.  IPO's have been down sharply until very recently, so this option has not been given much consideration.  Sales have continued, but with valuations low, this is often not a favored option.  Bankruptcy is, as always, fraught with difficulties as firms consider the opposition of creditors as well as the value of their secured positions, if any.

Throughout the financial crisis, distressed investing has continued.  With the credit markets tight, private equity and other firms have taken some opportunities to fund companies that have not been able to get credit in the traditional credit markets.  These efforts persist, and the firms continue to focus sharply on the fundamentals of these companies in order to protect their investments. 

Move over Sarah Palin. While "Going Rogue" may be the talk inside the beltway, there's a new book that has captured the attention of many on Wall Street: "The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis".  The author, Joshua Kosman, forebodes the possible collapse of many companies owned by private equity firms.  While it certainly isn't clear whether what Kosman's is prophesying about will in fact turn into a significant chapter in U.S. history books, it's an interesting read nonetheless.  A short excerpt on NPR can be found at:

http://www.npr.org/templates/story/story.php?storyId=120391729
 

A recent edition of PitchBook News Private Equity: Basic Edition cited a decrease in 2009 in exits from private equity investments through sales to other private equity firms.  The article stated that these secondary sales are down approximately 22 percent from their levels in 2005 through 2007.  In 2008, many private equity exits took the form of sales to strategic buyers.  In 2009, IPOs increased by approximately 19 percent, according to the article. 

So what does this mean?  Late 2007 saw the beginning of the current economic crisis and, in that time, it appears that private equity firms continued to feel confident in investing their money.  In many cases, they did so by buying out other private equity firms. 

In 2008, when it became clear that the economic crisis would not be short-lived or minor, strategic buyers became the most obvious source for private equity liquidity.  Strategic buyers saw opportunities to enhance their businesses through the synergies offered by private equity portfolio companies.  In addition, valuations were very low:  the perfect formula for strategic acquisitions.

In the later parts of 2009, we have seen the public equity markets bounce back significantly.  Instead of shying away from the public markets' previously unequaled volatility and sharp decreases in value, private equity firms looking for an exit option seem to have again turned their focus to the IPO as a possible exit strategy. 

Hopefully, markets will continue to stabilize, valuations will become more reliable and private equity firms will invest some of the money they are currently holding.  If all these things happen, we can hope to see a return of multiple options for private equity exit strategies.
 

Some studies suggest that the answer is  yes!  In a recent study, the Preqin Research Report Private Equity Investor Survey August 2009, many limited partners (LPs) investing in private equity funds reported that the balance of power in negotiations between the funds general partners (GPs) and the LP's had shifted in favor of the LPs.  In fact, according to the Preqin report, in April 2009, 27 percent of investors thought they had greater negotiating power.  Three months later, in July 2009, 55 percent of investors interviewed by Preqin believed they had greater negotiating power.

Why would that be?  Certainly, one of the reasons is that levels of LP investment have fallen significantly from previous years.  According to the Preqin report, private equity funds raised $194.5 billion in the first quarter of 2008, while they raised only $64 billion in the first quarter of 2009.  The GPs have to compete for the limited LP funds that are actually being invested now.  One of the ways to do that is to offer LPs more favorable terms.

So, cash-rich LPs appear to be returning to the market.  Private equity fundraising has already begun to improve in 2009.  According to the Preqin report, $79.7 billion was raised by private equity funds in the second quarter of 2009 as compared to $64 billion in the first quarter of 2009.

The Alliance of Mergers & Acquisitions Advisors and PitchBook Data recently released a study of the private equity industry.  The study showed that there is an overhang of approximately $400 billion in private equity fundraising.  That means private equity firms have raised about $400 billion more than they have invested.  There's a lot of money out there waiting to be invested.  In fact, it's at an all-time high.  Click here to see a copy of the report.

As tough as times have been, people have continued to give their money to private equity funds.  The funds just haven't found companies that they consider good investments.  So what needs to happen?  According to some, it's a matter of companies lowering their expectations.  Companies can no longer expect to get the kind of multiples or the kind of leverage that were used before 2007.  Others say it's all about the stability of the economy and the re-opening of the credit markets.  Still others say that investors need to change the way they do diligence on a company.  The old methods will no longer work in light of the current economic realities.

So which is it?  Probably a combination of all.  Either way, I look forward to the days when we start to use that $400 billion.

The American Recovery and Reinvestment Act of 2009 includes few provisions that will have an impact on private equity and venture capital funds.  One provision that could affect private equity funds and their portfolio companies is a tax provision that will permit companies to restructure their outstanding troubled debt and defer the tax consequences thereof for five years.  The provision will allow companies to more easily deleverage their balance sheets, and thus should be considered by private equity funds and their portfolio companies which have outstanding debt.

Read the entire article on debt restructuring tax relief.

As we all know, we are in a recession.  In these difficult economic times, everyone is wondering where we can find money to help start or grow our businesses.  It seems that everyone is holding their money close to the vest.  In reality, however, there are many different places where a company can obtain equity or debt financing to help its business.  The key is understanding what type of money is available.

Traditionally, the first place to find money when starting a new business is from family and friends.  Obviously, investments from family and friends are made in large part upon the relationship you have with those individuals, but you need to be careful to comply with federal and state securities laws.  This usually means that you want to make sure you investors are accredited investors and that you conduct your private offering in compliance with an exemption under Regulation D  of the federal securities laws.  There are limits on the number of investors and the amount of financing a company can receive in order to fall within one of the many exemptions.  Family and friends are still providing capital during the recession, however the amounts that can be raised from family and friends have diminished as individual investment and savings accounts took a beating from the drop in the equity markets over the last year.

If you do not have close friends or families with the available cash to invest in your business, "Angel investors" can be and are a still a great source of capital.  Angel investors are high net worth individuals that can provide large tranches of capital through equity or convertible debt investments.  Typically, angel capital is the second round of capital that start-up companies and businesses receive and can provide capital in the range of $500,000 to $2,000,000 depending on the needs of the company and the willingness of the "angels" to invest.  Although angel investors are more selective in these economic times, angels are still investing and are looking for the right opportunities and the right companies.  Once again, when raising money from angels, you need to comply with federal and state securities laws and structure your offering to comply with on the private offering exemptions.

Venture funding is another source of capital that can be very advantageous for start-up companies.  Venture funding comes at a price.  Generally, venture capital firms will require a seat on the board, veto rights on major decisions such as additional financing and sale of the company, and a high return on their invested capital.  There are numerous venture capitalists looking to deploy money right now.  They are more selective in these economic times, but the venture capital firms typically do have the money to invest.  Venture funding is one of the key types of financing that provides the necessary capital infusion to allow a company to take the next step.

Private equity capital is generally available for more mature companies that are looking to expand and grow.  Private equity investments can take a variety of forms and generally involve a buy-out or a purchase of a majority equity interest in a company.  As with venture funding, there are numerous private equity funds with millions of dollars to deploy right now.

Traditional debt financing from institutional banks is available to companies as well.  The credit markets have suffered through the banking crisis and the recession, but the current administration's policies have encouraged banks to loosen the reigns to start lending money again.  It remains to be seen whether that will work.  A bank will generally require security interest the company's assets including inventory, real estate and/or accounts receivables, pledge of stock or a personal guaranty.  Bank financing will also require meeting certain financial covenants.

The American Recovery and Reinvestment Act (ARRA) is being scrutinized on every level, and the overall assessment is that the bill is good for green.  From production tax credits to grants, weatherization to infrastructure investment, money is there to be received but you have to work quickly, and through the proper processes, to receive the funding.  Watch for tight timelines and meet the dates!

Some programs are being implemented by the Department of Energy.  On Thursday Energy Secretary,  Steven Chu, announced he intends to streamline the process by which the Energy Department distributes funding, with the goal of dispersing 70 percent of its funds from the ARRA by the end of 2010.  He is naming Matt Rogers as a senior adviser to implement the new department reforms which include rolling out appraisals of applications for loan guarantees, rather than waiting for the application deadline to evaluate them.  He said that the loan application forms will be simplified and the department will speed up loan underwriting by using outside partners.  The Treasury Department is also tasked with crafting regulations to implement the stimulus funding.

Specifically for Indiana, you should know the process for the:

Indiana Brownfields Program - Contact a Petroleum Remediation Grant consultant in your region.  A potential project list will be compiled by March 4, 2009. Right now the list is focused on petroleum contaminated sites, however the program may be able to open site consideration to hazardous substances as well.

Indiana State Revolving Fund - Drinking Water and Wastewater programs.  The Indiana Finance Authority (IFA) will be provided approximately $94 million to fund wastewater infrastructure projects and about $26 million to fund Drinking Water infrastructure projects.  The IFA created the SRF Loan Program Recovery Loan and Grant Program.  All standard SRF Loan Program requirements apply. Fixed rate loans (20- year terms) and grants are available.  Make sure that your community has completed a Preliminary Engineering Report and have it filed with the SRF Loan Program by March 13, 2009.

As always think about where the remainder of the financing is going to come from.  For instance, if you are applying for the 30 percent Department of Energy grant for eligible wind, biomass, geothermal and solar plants, make sure that you have a plan in place to fund the remaining 70 percent.  Start talking with your investment and private equity team to craft the entire package.

The American Recovery and Reinvestment Act (ARRA) is being scrutinized on every level, and the overall assessment is that the bill is good for green.  From production tax credits to grants, weatherization to infrastructure investment, money is there to be received but you have to work quickly, and through the proper processes, to receive the funding.  Watch for tight timelines and meet the dates!

Some programs are being implemented by the Department of Energy.  On Thursday Energy Secretary,  Steven Chu, announced he intends to streamline the process by which the Energy Department distributes funding, with the goal of dispersing 70 percent of its funds from the ARRA by the end of 2010.  He is naming Matt Rogers as a senior adviser to implement the new department reforms which include rolling out appraisals of applications for loan guarantees, rather than waiting for the application deadline to evaluate them.  He said that the loan application forms will be simplified and the department will speed up loan underwriting by using outside partners.  The Treasury Department is also tasked with crafting regulations to implement the stimulus funding.

Specifically for Indiana, you should know the process for the:

Indiana Brownfields Program - Contact a Petroleum Remediation Grant consultant in your region.  A potential project list will be compiled by March 4, 2009. Right now the list is focused on petroleum contaminated sites, however the program may be able to open site consideration to hazardous substances as well.

Indiana State Revolving Fund - Drinking Water and Wastewater programs.  The Indiana Finance Authority (IFA) will be provided approximately $94 million to fund wastewater infrastructure projects and about $26 million to fund Drinking Water infrastructure projects.  The IFA created the SRF Loan Program Recovery Loan and Grant Program.  All standard SRF Loan Program requirements apply. Fixed rate loans (20- year terms) and grants are available.  Make sure that your community has completed a Preliminary Engineering Report and have it filed with the SRF Loan Program by March 13, 2009.

As always think about where the remainder of the financing is going to come from.  For instance, if you are applying for the 30 percent Department of Energy grant for eligible wind, biomass, geothermal and solar plants, make sure that you have a plan in place to fund the remaining 70 percent.  Start talking with your investment and private equity team to craft the entire package.

As Associated Press business writer Michael Liedtke observed in his October 20, 2008 article Feeling Financial Squeeze, VCs Curtail Investments, “Although a drought hasn't set in yet, it's looking inevitable as the ripple effects of a worldwide financial crisis rattle venture capitalists.”

According to data released by Thomson Reuters, PricewaterhouseCoopers and the National Venture Capital Association, venture capital investments have recently experienced the largest decline since spring of 2003 following the dot com bust.

Many venture capital firms are advising the management teams of their portfolio investments to revise their short-term business plans to reduce costs by laying off staff and trimming budgetary spending in expectation of a worsening recession.

Although venture capital investments have experienced the largest drop off in the last decade, there is a silver lining in the form of a rising interest in biotechnology and alternative energy.  As stated by Terry Kosdrosky in Private Equity Has Toolkit to Ease Troubled Market, “Political leaders and the public are hungry for renewable sources of energy that will lessen the country's dependence on foreign oil and cut down on pollution.”

Venture capital and private equity funds have followed the emerging trend of new companies seeking to stake a founding interest in these industries.  For example, Liedtke cites statistics supporting a 21 percent increase in venture capital investments in biotech startups from last year, while alternative energy, was close behind with a 17 percent increase.

In addition to venture capital opportunities in the U.S. biotechnology and alternative energy industries, Kosdrosky also points to growing opportunities overseas, stating “With growth stunted in the U.S., many private equity firms are looking to put their money to work in growing markets such as China and India.”

The current financial climate has forced venture capitalists to focus their resources on existing investments rather than taking on new challenges.  What does all this mean?  Despite the downturn in the global economy, opportunities for lucrative venture capital investment still exist, albeit in new forms and perhaps in sectors not previously considered.  As blogger Seth Levine wrote in his October 22, 2008 post of VC Adventure, “Be flexible. Seek outside input. Be introspective. Stop and consider what you're learning and if it effects key assumptions behind your business idea. Tweak what you're doing.  Repeat.”

Jennifer Rhodes is a partner in Ice Miller's Private Equity/Venture Services Practice.  Her primary area of concentration is in private equity fund formation and operations, venture capital and private equity financings, mergers and acquisitions, and general corporate matters.

In our third in a series of life science distinguished speakers luncheons we were honored to have Dr. Ora Hirsch Pescovitz the Executive Associate Dean for Research and Edwin Letzter Professor of Pediatrics at Indiana University School of Medicine. She served as director of Pediatric Endocrinology and Diabetology at Indiana University School of Medicine from 1990-2004. In September 2004, she was named to the position of CEO and President of Riley Children's Hospital. In her role in the Dean's office, she oversees all research at the School of Medicine

Dr. Pescovitz asked the question why do life science research in Indiana? And the answer lies within the state’s national ranking for five major health indicators in Indiana: cancer deaths, smoking prevalence, obesity, cardiovascular deaths, and diabetes.  The state ranks in the bottom half of each of these health indicators, and in the bottom 10 of all states in most cases. 

Not only the health impact, but the economic impact is another reason for the state to focus on the life science industry.  Dr. Pescovitz mentioned that high-tech research driven industries have contributed to over a third of the nation's economic growth over the past decade and the U.S. biotech industry had revenues of over $65 billion in 2007, which is up 11% nationally over 2006, so why shouldn't Indiana be getting a piece of that important pie? 

Dr. Pescovitz also discussed how Indiana University School of Medicine is driving the life sciences initiative in Indiana and provided examples of new Indiana businesses, such as Fast Diagnostics, CS Keys, EndGenitor and Immuneworks, not only expanding the technology and research but also bringing in new forms of revenue to the State.  She pointed out that success in the life sciences industry requires a significant amount of collaboration. 

The Indiana Clinical and Translation Scientists Institute is a statewide partnership to transform life science research and health care delivery.  The goals of this project are largely to use basic discoveries and translational approaches to new scientific discoveries from the bench to the bed-side and then to translate these discoveries from the bed-side and move them into the community and from the community into actual medical practice and then taking that feedback from the community back to the researchers so it really is a full cycle. 

Dr. Pescovitz closed by commenting that the cost of life science research is high, but the  return on investment is priceless.

Like the little black dress, socially responsible investing (SRI) is not new but is ever present and constantly updated. The history of SRI includes boycotting of investments in companies that profited from the Vietnam War, avoidance of investments in South Africa during apartheid and, more recently, investment in companies developing sustainable energy strategies, promoting clean water, preventing climate change, producing organic foods, promoting consumer protection and other categories.

 

SRI can be defined in a number of ways, but it generally refers to an investment strategy that considers not only profit but also the social, environmental or other impact of the investment. This "double bottom line" approach is intended to maximize both financial return and social good. Sounds great. Lots of people seem to think so.  According to a recent study by the Social Investment Forum, approximately 11% of assets under management in the United States are involved in SRI. SRI assets increased from $639 billion in 1995 to $2.71 trillion in 2007.

 

As particular types of social activism (think environmental preservation) became accepted mainstream societal values, venture funds with a socially conscious agenda are becoming more common.  There's also the growth of so-called "greenwashing" that has likely contributed to the increase in SRI. Companies wanting to cash in on this societal trend may use environmental protection essentially as a marketing strategy. But, the actual operations of the business may not be carried out in an environmentally friendly manner. Your typical investor would not be in a position to know and may therefore not effectively accomplish their identified goals with their investment dollars.

Will the growth in SRI continue?

 

Hard to say. Funds in SRI, so far at least, have had to be "patient capital." That is, there are no quick returns and the investor should not expect liquidity on the short timeframe that is typical for private equity transactions. SRI funds and SRI companies seeking investment will have to control expectations of their investors as they strive to meet their double bottom line goals. Another concern is that the trend will catch on in a manner reminiscent of the dot com bubble.  Many investors funded dot com companies without adequate diligence and, as a result, many of those companies failed to meet their projected returns. The failure cast a dim light on all Internet-based companies, regardless of their merits as investments.

We can only hope the same does not happen to SRI. The idea of SRI is a noble one. I'd hate to see it fail because we all jump on the bandwagon before the underlying premise has been proven to make for a valuable investment

Jennifer Rhodes is a partner in Ice Miller's Private Equity/Venture Services Practice.  Her primary area of concentration is in private equity fund formation and operations, venture capital and private equity financings, mergers and acquisitions, and general corporate matters.

On April 25, 2008, Ice Miller hosted Dr. Mervin Yoder, with the Indiana University School of Medicine, for a presentation on umbilical cord research and stem cells.  Dr. Yoder is a professor of pediatrics focusing his research efforts on stem cell transplantation.  He also serves on the Board of Directors of EndGenitor Technologies and is the medical director for The Genesis Bank in Indianapolis.

 

At the conclusion of Dr. Yoder's remarks, one of the participants asked about the venture capital opportunities for commercialization of stem cell research.  According to Dr. Yoder the outlook is promising, especially in light of recent legislation at the Indiana statehouse that established a public umbilical cord blood bank in Indiana.  The end goal is to be able to collect, screen and maintain as many samples, or units as possible.  These units can then be used for treatment or, if deemed inappropriate for transplantation, they can be used for further research.

 

Dr. Yoder spoke specifically about his work with two promising life science companies:  EndGenitor Technologies and The Genesis Bank.  Founded in 2004, The Genesis Bank serves as a cord blood bank and was founded by physicians and scientists specializing in cord blood therapies, neonatal medicine, and cell and tissue preservation. Currently The Genesis Bank has banked over 4,000 cord blood samples.

 

EndGenitor Technologies' mission is to isolate, expand and commercialize novel umbilical cord blood stem cells for the emerging field of self-therapeutics.  EndGenitor has licensed (from Indiana University Research & Technology Corporation) technology relating to proprietary, novel, and highly proliferative stem cell populations that mature into the lining of new blood vessels.

 

Both of these companies are examples of life science start-ups, headquartered in Indiana, that are focused on therapies and research relating to stem cells. 

 

Dr. Yoder described stem cells as, "an incredible biological resource."  As more and more companies look to fund stem cell research, and as the research is commercialized and brought to market, we can expect to see new promising treatment options for a variety of blood diseases.

Jennifer Rhodes is a partner in Ice Miller's Private Equity/Venture Services Practice.  Her primary area of concentration is in private equity fund formation and operations, venture capital and private equity financings, mergers and acquisitions, and general corporate matters.

 Dr. Homer L. Pearce's remarks during Ice Miller's recent life science distinguished speaker's series highlight the importance of sufficient research funding for success in the war on cancer.  Research and development costs associated with identifying pharmaceutical solutions are particularly daunting and, given the time to market and current patent protection periods, sometimes commercially unjustifiable.

As a result of the targeted efforts of many, including the Indiana Economic Development Corporation and BioCrossroads, among others, Indiana's unique contribution to the national life science sector is becoming increasingly recognized - not only in terms of its many research institutions, major pharma companies and contract service providers, but also with respect to availability of funding.  In 2006, according to PricewaterhouseCoopers, Indiana ranked 21^st in the nation for venture capital investments in the life science sector.

 

According to the S&P-2006, Purdue and Indiana University currently have $200 million in academic life science funding commitments and graduate 10,000 science and engineering students each year.  Both institutions are developing innovative diagnostic equipment and pharmaceutical protocols that, with appropriate funding, can bring life saving treatments to market.  The financial needs of Indiana's innovators have not gone unnoticed by public and private financial sources that are positioned to fund such developments. 

 

In 2008, we should expect to see further growth in Indiana's life science community as our state's leading research scientists build on the efforts of past scientific contributors to develop cutting-edge technologies and as funding sources become increasingly available both locally and nationally.